Foolish Forecast: Procter & Gamble a Sure Thing?

Procter & Gamble (NYSE: PG  ) , that magnate of fast-moving consumer goods (FMCG), starts off its string of fiscal 2008 earnings reports tomorrow. After two straight years without missing a quarterly estimate, investors are wondering -- how long can the good times keep rolling?

What analysts say:

  • Buy, sell, or waffle? Twenty analysts follow P&G, giving it 15 buy ratings and five holds.
  • Revenues. On average, they expect to see sales rise 7.5% to $20.19 billion.
  • Earnings. Profits are predicted to expand 12.6% to $0.89 per share.

What management says:
Speaking at the company's annual meeting earlier this month, CEO A.G. Lafley observed that "every year, the growth challenge becomes more demanding, and the year ahead is no exception." Assuming the analysts have it right (and they should -- their numbers basically parrot what P&G itself told us last month), tomorrow's news will prove Lafley's warning prescient, as business slows somewhat from last year's performance. In fiscal 2007, the company grew its sales 12%, and earnings per share grew 19%.

What management does:
Raw material costs and energy costs are expected to continue rising, but the benefits from volume leveraging and cost savings projects should help keep margins improving. Management stated last quarter that it has plans to spend fiscal 2008 investing in restructuring strategies. Such efforts should help increase productivity and efficiency; help keep its margins competitive with those boasted by rivals Kraft (NYSE: KFT  ) , Unilever (NYSE: UL  ) or Kimberly Clark (NYSE: KMB  ) ; and even raise the company up to the caliber of a Johnson & Johnson (NYSE: JNJ  ) .

Margins

3/06

6/06

9/06

12/06

3/07

6/07

Gross

51.2%

51.4%

51.8%

51.9%

51.9%

52.0%

Operating

19.3%

20.3%

20.5%

20.8%

20.7%

20.2%

Net

12.7%

12.7%

13.0%

13.1%

13.3%

13.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
P&G generated free cash flow equal to 101% of net income last year. Relative to management's "90% goal" for free cash flow, that sounds like a lot -- but in point of fact, cash profits have averaged more than 116% of net income over the last six years. (Which makes this Fool wonder whether 90% is less a "goal" than an acknowledgement that this seems to be the direction in which things are heading.)

Still, $10.5 billion in annual cash profits is a tidy sum. Management announced in August that it will be deploying the vast majority of the loot in an effort to reduce its share count, spending as much as $10 billion per year over the next three years on share buybacks. Shareholders generally cheer buybacks, as they can often support a sagging stock price, but in this case, I suspect they're not getting their money's worth. P&G shares sell for 23 times trailing free cash flow, but analysts only expect the company to grow its profits at 11% per year over the next half decade -- not exactly a bargain for P&G ... or for you.


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